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Bankruptcy and Divorce: What You Should Know

 

[12.15.2021]

 

Divorce and Bankruptcy are independently two extremely stressful events; together, they can feel unmanageable. Here’s some helpful information when contemplating both divorce and bankruptcy:

 

 

What Is Chapter 7 Bankruptcy?

 

A Chapter 7 bankruptcy is the less complex, speedier version of bankruptcy. It is feasible that an individual may represent themselves in a Chapter 7 and that the process might resolve in a matter of months. However, a Chapter 7 bankruptcy will potentially result in some of your property being sold to repay your creditors.

 

 

What is Chapter 13 Bankruptcy?

 

Conversely, Chapter 13 bankruptcies are much more complex, usually taking several years to resolve and almost necessitating legal representation. However, Chapter 13 bankruptcies function as a type of “repayment plan”, allowing you to keep your property, while slowly repaying your debts.

Both forms of bankruptcy result in the elimination of most (but not all, as we’ll discuss below) of your outstanding debt. Speak with a bankruptcy attorney to determine which type of bankruptcy is right for you.

 

 

How To Decide?

 

There are several factors to consider when deciding the order in which to file for bankruptcy and divorce. The primary issues are whether filing jointly with your spouse is in your best interest and the current status of your debts/assets.

 

 

Divorce First

 

Filing for divorce first will remove the possibility of filing jointly for bankruptcy with your spouse. On one hand, this may allow you to qualify for a Chapter 7 bankruptcy if your household income was previously too high to do so. This will also allow you to discharge debts you incurred during the course of your divorce. If you anticipate a contentious divorce, removing your spouse from the bankruptcy equation is also a benefit of this strategy.

 

 

Bankruptcy First

 

Filing for bankruptcy first might make sense if you have significant equity in your assets that you would like to protect in anticipation of divorce. For example, if you are hoping to maintain the marital home as a residence for your minor children, you may wish to complete your bankruptcy and resolve your outstanding mortgage debts before pursuing a divorce and avoid the immediate risk of foreclosure. Bankruptcy first may also be a good option if you are on amicable terms with your spouse. Not only can the costs of the bankruptcy be shared between you, but the process of dividing assets and debts during the divorce will be simplified. A Chapter 7 bankruptcy filed first can be completed quickly under certain circumstances and is unlikely to significantly delay divorce proceedings.

 

 

Filing Simultaneously

 

This option, while it may seem enticing to have both matters over and done with, should be approached with caution. Juggling two legal matters at the same time is a stressful and expensive endeavor. More

importantly, the bankruptcy filing will result in something called “the automatic stay”, essentially cutting off access of creditors to you and your property. This stay also prevents the court from dividing the assets in a timely manner, stretching out the divorce process much longer than necessary.

 

 

Other Major Considerations

 

 

Joint Debts

 

If you currently have debts that are in both you and your spouse’s name, you should be aware that you may remain liable after your spouse discharges those debts through a non-joint bankruptcy that occurs prior to divorce.

 

 

Support Obligations

 

Unlike most debts, child and spousal support obligations cannot be discharged through bankruptcy. An individual with an ongoing obligation or an existing arrears will not be relieved of those debts through the bankruptcy process.

 

 

Student Loans

 

Like support obligations, student loans cannot be discharged through a bankruptcy case. If you and your spouse are carrying student loan debt, the division of that debt will need to be determined in the divorce proceedings.

 

 

The Automatic Stay: Support Obligations and Equitable Distribution

 

As discussed above, individuals in bankruptcy are protected from creditors by the automatic stay. The automatic stay primarily prevents creditors from continuing all collection activities while the bankruptcy is ongoing. Spousal and child support collection activities, however, are exempted from the automatic stay. Therefore, child support and alimony proceedings against a debtor may continue during bankruptcy. However, judges will likely be required to postpone the equitable distribution portion of a divorce proceeding until after the conclusion of a bankruptcy.

 

Navigating the implications of divorce on your finances and future is a complicated process.To learn how our team can help you, contact WhitbeckBennett by calling 800-516-3964 or emailing clientservices@wblaws.com.

 

By: Lauren Hunt

By: Lauren Hunt

Lauren Hunt was formerly an Associate Attorney of WhitbeckBennett. She was born in Fairfax, Virginia, but she considers Nashville, Tennessee home. Lauren graduated with a bachelor’s degree in Sociology from Pepperdine University and earned her law degree at the University of Alabama School of Law – where she graduated with a Public Interest Certificate and an Order of the Samaritan.

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